Analysis: Shunned UK markets emerge as haven from global storms

Peel Hunt

12/07/2024 06:00

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      Stable UK eyed as haven vs heightened uncertainty
elsewhere
    

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      UK listings and inflows revival likely - bankers
    

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      But haven status needs solid long-term growth - investors
    

  
    By Naomi Rovnick and Anousha  Sakoui
       LONDON, July 12 (Reuters) - Investors are looking at UK
markets as a potential haven as political uncertainty rises in
the U.S. and elsewhere in Europe, in what could mark a stunning
turnaround for a country that appeared to have lost its
traditional appeal to global capital.
    A landslide election victory for Britain's centre-left
Labour government last week offers the prospect of predictable
policy and improved trade with the European Union to reboot an
economy that has struggled since the 2016 Brexit vote.
    Meanwhile, parliamentary gridlock in debt-laden France has
stirred memories of previous euro zone crises, and investors are
scrambling to guess what former U.S. President Donald Trump
regaining the White House might mean for markets. 
    Britain's economy is picking up, and some bankers expect a
revival for UK stock markets shrivelled by relentless selling
during years of turbulence under successive Conservative
governments.
    BlackRock Investment Institute, a research arm of the
world's largest asset manager, said on Tuesday it was bullish on
UK stocks, potentially heralding a mood shift among major global
institutions that have cooled on Britain since 2016. 
    But even those moving funds into the UK warned that its
haven appeal may be short lived unless new Prime Minister Keir
Starmer pulls off a bold plan to boost living standards without
straining the nation's stressed finances further. 
    "The (UK) election improves things at the margin and the
uncertainty on Europe driven by France means there could be a
honeymoon period for Britain for a bit," said Pictet Wealth
Management chief investment officer César Pérez Ruiz. 
    "The market is going to be asking for more detail on fiscal
spending and (Starmer) hasn't given us a lot of information." 
    Pérez Ruiz said he sold some European corporate debt because
of French political risk and bought UK equivalents instead, but
may not hold the position beyond six months. 
    GREEN SHOOTS? 
    Investors have kept pulling money out of UK equity funds and
stock market trackers since the July 4 election, daily data from
information provider Lipper showed.  
    Yet there are also some positive signs.
    After a dearth of London listings, potential large offerings
are on the horizon from the likes of Shein and De Beers, with
some bankers predicting the UK market will revive more broadly
next year. On Thursday, the UK market regulator fast-tracked a
swathe of listing rule changes in a bid to encourage more IPOs. 
    London's share of European IPO volumes dwindled to just 1%
in the year to mid-May, down from 28% in the same period in 2021
when the market boomed.     
    "There's a couple of reasons to be positive and certainly
relatively more positive about the UK than other regions," said
Peel Hunt equity capital markets head Brian Hanratty.     
    "I don't want to say it is like a dam breaking." 
    He had observed companies holding early stage investor
meetings and more discussions with accountants about IPOs, he
added. 
    Some big investors are turning more optimistic too. 
    "We see a virtuous cycle taking hold," Fidelity
International head of multi-asset Salman Ahmed said, if Labour
rebuilds EU trade links and revives business spending. Fidelity
has a neutral view on Britain although some funds are increasing
exposure. 
    Matt Evans, portfolio manager at NinetyOne, said UK
companies he meets with were readying investment projects that
they had delayed under the Conservatives. 
    DEBT JITTERS
    Weak UK public finances remain a source of concern, as state
borrowing approaches 100% of economic output, and the 2022
market chaos unleashed by Conservative Prime Minister Liz Truss'
under-funded mini-Budget remains fresh in memories. 
    Labour wants to attract private investment into
infrastructure and housing, potentially boosting 2024 growth
beyond the 0.7% economists polled by Reuters expect. 
    Gilts had short-term support from expected Bank of England
rate cuts but the UK was not a debt market haven unless Labour
could prove an untested commitment to budgetary caution, said
James Athey, fixed income manager at London investment group
Marlborough. 
    While off highs hit in 2023, Britain's 10-year bond yield
has still risen 60 basis points this year to 4.15%  GB10YT=RR ,
underperforming U.S. and German peers. 
    BlueBay Asset Management chief investment officer Mark
Dowding said he would not increase UK exposure while
inflationary pressures remained.
    In another sign of some caution, London's FTSE-100 index,
 .FTSE , valued on a price-to-earnings ratio almost 50% below
that of U.S. stocks, has underperformed global benchmarks
 .MIWO00000PUS  so far this month. 
    "The (UK) risk-reward is pretty favourable," BNP Paribas
head of equity strategy Dennis Jose said. 
    But as for capital coming back? "Not yet. It will take a
little more time." 

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UK business investment lags other developed economies    https://reut.rs/3zBRKRp
Funds investing in UK stocks have seen 44 months of outflows   
https://reut.rs/3Y9RTpx
UK borrowing costs have risen sharply since 2021    https://reut.rs/3XKN85s
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 (Reporting by Naomi Rovnick and Anousha Sakoui. Additional
reporting by Dhara Ranasinghe and Yoruk Bahceli; Editing by
Dhara Ranasinghe and Mark Potter)
 ((Naomi.Rovnick@thomsonreuters.com;))